Moody’s Says U.K. Faces Challenges to Meet Its Debt Targets

By Scott Hamilton -
Jul 31, 2012

Moody’s Investors Service cut its
growth forecasts for the U.K. and said the government will face
increased difficulties in meeting its debt-reduction timetable.

“Moody’s sees rising challenges in achieving debt
reduction within the timeframe that has been laid out by the
government,” it said in a credit opinion in London. Still, it
“believes that the U.K. government’s response to negative
developments late last year indicates it commitment to restoring
a sustainable debt position.”

Chancellor of the Exchequer George Osborne has pressed on
with his planned fiscal squeeze to help protect Britain’s credit
rating even after the economy slipped into a double-dip
recession. Data last week showed gross domestic product fell 0.7
percent in the second quarter, the biggest decline in more than
three years.

Moody’s sees the U.K. economy growing 0.4 percent this year
and 1.8 percent in 2013, it said in the statement, dated
yesterday. The economy will return to trend growth of 2.5
percent, though this will take longer than previously expected,
it said.

“Should the U.K.’s growth potential have weakened
significantly, then this would create a significant challenge to
the government’s debt-reduction efforts and would place downward
pressure on the country’s rating,” Moody’s said.

Negative Outlook

Moody’s already has the U.K. Aaa rating on a “negative”
outlook. It said today that this outlook “in part reflects
concerns about the U.K.’s macroeconomic outlook for the next few
years.”

The ratings company added that the top rating is supported
by Osborne’s fiscal plan and the government’s push to get banks
to hold more capital, reducing the chance of the sovereign
having to step in to help lenders. It also said the U.K. has the
lowest refinancing risk of “all the large Aaa economies,” with
an average debt maturity of more than 14 years.

Standard & Poor’s affirmed its AAA rating on the U.K. last
week, saying that the government “remains committed to
implementing its fiscal program.”

Osborne, under fire from the opposition Labour Party for
his budget cuts, said S&P’s statement was “a reminder that
despite the economic problems we face, the world has confidence
that we are dealing with them.”

Osborne and Prime Minister David Cameron have said the
fiscal squeeze has helped to lower sovereign borrowing costs at
a time when the euro-area debt crisis is escalating.

U.K. 10-year gilts rose today, pushing the yield down 2
basis points to 1.52 percent. The yield fell to a record low of
1.407 percent on July 23.